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On the Edge with Max Keiser-Chilean Economy-10-29-2010-(Part1)

The Rising Cost of Survival

Rick Mills

As a general rule, the most successful man in life is the man who has the best information

Socio-economic turmoil – lawlessness, poverty, lack of adequate medical facilities and attention, low to no employment, low wages, disease, no clean drinking water or water for irrigation and shortages of food or unaffordable food can all cause socio-economic pressure to build in many countries that were once stable environments for investment.

In 2007 and 2008 roughly 40 food riots occurred – two of the more publicized examples were when people took to the streets after rising corn prices made tortillas very expensive in Mexico and skyrocketing food prices in Haiti led to the overthrow of that country’s Prime Minister.

The U.N. Food and Agriculture Organization (FAO) reported a five per cent increase in the international price of food over July and August 2010.

I think everyone is wondering if we are going to have a repeat of 2008 when there were food riots around the world.” Johanna Nesseth Tuttle, director, Global Food Security Project

The world’s developing economies mostly rely on food imports to sustain themselves. On average their citizens spend a much larger percentage of their wages on food than do their counterparts in developed nations. Some published estimates are as high as 50 to 60 percent of income going towards food.

Our agriculture system is concentrated on producing a very few staple crops – there is a very serious lack of crop diversity. Corn, wheat, rice and soy are the main staples and production is oftentimes half a world away from where the majority of the crop would be consumed. Taken together, this means if we get hit by a particularly bad harvest in one area, if a severe El Nino strikes, or more localized severe weather phenomena strikes, food supplies can get totally out of control in many countries.

Considering that the global food supply chain is weak (easily disrupted by lack of transportation, weather, insurgency, stealing) and non-existent in many areas then you have a recipe for potential disaster in many regions of the world. When, not if, this food supply shortfall happens, for whatever reason, then almost any city, and almost any countryside could be aflame with strikes, riots and civil disobedience.

Climate change

The worry about, and direct threat of, ongoing climate change impact on agriculture isn’t about the slow almost imperceptible changes caused by a gradual shift in our weather patterns. The greatest worry is that climate change might intensify already extreme events.

This seems to be happening today, witness the incredible drought and massive wildfires in Russia, the flooding in Pakistan, unbelievable hailstorms in Texas and unprecedented cold snaps in China.

And with extreme events being exacerbated by climate change an already stressed agricultural industry (by loss of arable land, shortage of fresh water for irrigation, increasing human population, staple food crops used for bio-fuel production, increasing energy costs and developing countries changing diets) is increasingly having a more difficult time feeding and clothing the world.

Many climatologists believe that the ongoing climate change the earth is undergoing will increase the frequency and severity of extreme weather events.


As I said, the most severe consequences of non-existent or more expensive staple foods are felt in developing countries whose citizens spend an exorbitant percentage of their incomes feeding themselves and their family compared to families in the western world. The recent riots in Mozambique were caused by a 30 percent hike in the price of bread after a double digit increase for water and energy – this happened in a country where many spend nearly 75 percent of the household budget on food. People in the poorer countries simply cannot afford increases in the price of food – in Mozambique the per-capita income is $800 per year.

The USDA believes food inflation will quicken it’s pace during the final months of 2010 and into 2011. “Although inflation has been relatively weak for most of 2009 and 2010, higher food commodity and energy prices are now exerting pressure on wholesale and retail food prices.” USDA food economist Ephraim Leibtag

We continue to be shocked and amazed at the size of the cotton moves. These are, without question, going to translate into higher prices for consumers but more at the low end.” Sharon Johnson, cotton analyst, First Capital Group

There was a massive hailstorm in Texas (the centre of U.S. cotton production) and a severe cold snap in China (the world’s top cotton producer). Both these extreme weather events happened on top of already record low cotton inventories. With cotton inventories drawn down to record lows farmers might be tempted to shift their production focus from soybeans and grains to cotton.

Fresh water for irrigation and drinking is getting harder to source and more expensive. Food, the energy used to produce our food, and cotton – most of the world lives in cotton – are all moving higher.

The Rising Price of Survival

It seems to this author that the increase in the price of food is the straw that breaks the camel’s back. The real cause of angst is the rising cost of living being felt in developing areas of the world. Many of these people, already living in poverty, and those on poverties edges, are far less capable of absorbing the increased costs of what is really just basic survival for themselves and their families. Yet this is the first group of people who are impacted by the coming unstoppable waves of inflation and real shortages –  whether localized or temporary because of supply chain breakages or poor harvests.

Hundreds of millions of marginalized people, people perhaps counted by the billions, across all nations, will feel the extreme pinch of increased prices, across all asset classes, on their household budgets. But especially so in what those people need the most – water, food and clothing – the bare essentials necessary for survival.

Country Risk

One of the most serious and, in many cases now unpredictable, risks facing investors is “country risk” – where the political and economic stability of the host country is questionable and abrupt changes in the business environment could adversely affect profits or the value of the company’s assets.

When a countries citizens get upset, when the drama hits the streets, when the riots start and those in power fear they are losing control and are in danger of being overthrown – regime change in many of these developing countries can quickly become a reality – they will act to please their populace. One of the first actions often taken is the nationalization of foreigners assets – often accompanied by placing the blame for the countries woes on anybody but the government, misdirecting the mobs attention.

All governments fear social unrest – social unrest breeds an upswing in regional militancy and insurgency – the 2007-08 food shortages and consequent rioting recently helped to trigger the collapse of governments in Haiti and Madagascar. Today, in Egypt, half the population depends on government subsidized bread. If Egypt’s present government cannot continue to subsidize bread for the masses upcoming parliamentary elections will be effected. In Serbia a public warning about a coming 30 per cent hike in the price of cooking oil has led to threats of demonstrations by trade unions.

The bottom line? Foreigners, no matter how entrenched in the country, have always made easy targets. Greedy, capitalist hating Marxist governments have never before needed an excuse to nationalize others assets, and they did so time after time. Now investors have something else to ponder and monitor – one that concerns all food importing countries governed by any political ideology.


The United Nations Food and Agriculture Organization acknowledges that higher prices are causing hardships. But they quickly add the situation that exists today is far less dire than the one in 2007-08. Hmmmm maybe, but this author does not believe that is going to be the case for long.

The relief we’ve seen, in the last two years – from this food, or rather from this higher cost of survival driven social unrest  – is very temporary, a calm before the storm. A shortage of fresh clean water for irrigation and drinking, fragile and easily disrupted food supply chains and extremely expensive (or non-existent) food, clothing and energy basics for emerging and developing nations is going to be the coming norm. And it’s going to cause chaos.

Long-term growth in global demand for agricultural products – in combination with the continued presence of U.S. ethanol demand in the corn sector and EU biodiesel demand for vegetable oils – holds prices for corn, oilseeds, and many other crops well above their historical levels.” USDA

Quantitative easing and a global currency race to worthless. Inefficient supply chains, intensified weather phenomena and a race to secure dwindling supplies of commodities by developed economies (and their richer inhabitants) all mean the very basics of human survival will become increasingly scarce for the poorer people in the developing world.

Are there storm clouds on your radar screen…no?

Well, there’s a storm brewing on the horizon. Maybe you should be keeping a weather eye on developments in the countries you’ve invested in.

Richard (Rick) Mills

PS – Let’s never forget, in our rush for profit, that there is a real human cost involved. There are untold millions of adults and children who go to bed every night hungry, thirsty and cold.

The Fed Underwrites Asset Explosion

Fred Sheehan

“That the economists…can explain neither prices nor the rate of interest nor even agree what money is reminds us that we are dealing with belief not science.” ~ James Buchan, Frozen Desire (1997)

The Federal Reserve is in disarray. Unsure of whether its QE2 strategy (quantitative easing – second round) should be tabled (see speeches of Thomas Hoenig, president of the Kansas City Federal Reserve Bank) or if it should pump $10 trillion into the economy (the unsolicited advice from economic columnist Paul Krugman), the New York Federal Reserve Bank has now asked bond dealers what it should decide at its upcoming November 3 meeting. [“Fed Asks Dealers to Estimate Size, Impact of Debt Purchases.”]. Since it is the belief in the integrity and competence of the Fed that backs the dollar, asking Wall Street what it wants is another reason to sell dollars.

Two recent speeches by Federal Reserve officials clarify the dishonesty and paranoia of this debauched institution. Both were delivered on October 25, 2010.

Speech number one is a fabricated history of the housing crisis, delivered by Chairman Ben S. Bernanke in Arlington, Virginia. He gave it at the Federal Reserve System and Federal Deposit Insurance Corporation Conference on Mortgage Foreclosures and the Future of Housing. The conference title alone is enough to know that no good will come from this boondoggle:

“It was ultimately very destructive when, in the early part of this decade, dubious underwriting practices and mortgage products inappropriate for many borrowers became more common. In time, these practices and products contributed to problems in the broader financial services industry and helped spark a foreclosure crisis marked by a tremendous upheaval in housing markets. Now, more than 20 percent of borrowers owe more than their home is worth and an additional 33 percent have equity cushions of 10 percent or less, putting them at risk should house prices decline much further. With housing markets still weak, high levels of mortgage distress may well persist for some time to come.

“In response to the fallout from the financial crisis, the Fed has helped stabilize the mortgage market and improve financial conditions more broadly, thus promoting economic recovery.”

You may note, not a word of the Federal Reserve’s complicity – not its mad money expansion, not its one percent interest rate (the fed funds rate) that turned susceptible mortgage-buyers into highly leveraged speculators, not the Fed’s decade-long enticement of Americans out of savings and into “risk assets,” not its terrorist tactics at frightening the American people into saving the parasite banks, and then, having successfully terrorized itself, cutting the fed funds rate to zero, a condition that is suffocating the lower 99%.

In Bernanke’s final sentence (In response…), he claims the Fed saved the mortgage market and restored the American dream, or whatever the imposter is trying to sell. It would be more accurate to confess that if the Federal Reserve did not exist, there is a good chance there would have been no need to stabilize anything.

There are moments when Federal Reserve officials speak the truth. In 1934, Eugene H. Stevens, chairman of the board of the Federal Reserve Bank of Chicago, spoke clearly about ridding ourselves of zombie banks. Quoting the October 24, 1934, New York Times: “The cleansing of the American banking structure of the parasites of ‘occasional incompetency and dishonesty’ in the last year and a half has put it in the strongest position of safety and good management.”

Two years after the United States missed its opportunity to clean house, the banking system is in a weak position of instability and bad management.

Speech number two, by New York Federal Reserve President William C. Dudley, is an insult to anyone not getting rich within the parasitic Washington-Wall Street nexus: In response to a question from his audience at Cornell University, Dudley asserted:

“To the extent that we can do things to improve the economic environment, we certainly owe it to the millions of people who are unemployed to do so.”

In his speech, Dudley, a former managing director at Goldman, Sachs & Co., described how the Federal Reserve has amortized this debt to the American people:

“The Fed responded aggressively and creatively… [to the] financial crisis that broke in mid-2007…. [W]e took aggressive steps to ease monetary policy in order to support economic activity and employment…. When the Fed buys long-term assets, it pushes down long-term interest rates. This supports economic activity in a number of ways, including by making housing more affordable and boosting consumption in households that can refinance their mortgages at lower rates.”

In other words: the Fed has cornered markets in an attempt to induce overextended households to spend money again and restore an economy the Federal Reserve has hollowed out. Again, this is a warning to investors: any substantive rationale for holding assets that trade on markets needs to be weighed against the knowledge that prices are not real. There are consequences – intended now, unintended later – to trillion dollar experiments dreamt up by academic economists.

Dudley said what is demanded of Federal Reserve officials when they discuss the bank bailouts:

“A handful of times, we made the difficult decision to make emergency loans to prevent the disorderly failure of particular firms. We did so not because we wanted to help the firms, but because allowing them to collapse in a disorderly fashion in the midst of a global crisis would have harmed households and business throughout the United States.” [My underlining.]

Why does he use the word “firms” instead of “banks?” There is probably no Federal Reserve official who knows better the disorderly fashion in which the Too-Big-To-Fail banks collapsed. His then-current employer, Goldman, Sachs, an investment bank, had failed. It was saved by the dubious Federal Reserve maneuver of turning the investment bank into a commercial bank.

Dudley told his audience to leverage its portfolios:

“With regard to monetary policy, the Fed has in place a highly accommodative stance. The FOMC has said that it will keep short term interest rates at exceptionally low levels for an extended period of time. The Fed also retains large amounts of mortgage-backed bonds acquired in order to support the housing market and help bring down mortgage and other long-term interest rates to the historically low rates in place today.

“The FOMC and the Chairman have stated their commitment to take further actions to bring interest rates down further should economic conditions warrant.”

Dudley avoids typical Federal Reserve euphemisms here. He states the Fed controls short-term interest rates, is supporting long-term interest rates (is preventing them from rising), and is supporting the mortgage market (is preventing mortgage securities and house prices from falling). Not in this speech, but elsewhere, Dudley and other Fed officials have indicated they are propping up the stock market. It is doing more than that: U.S. stocks have risen 10% since this latest Federal Reserve, carpe diem, open-mouth policy debuted last month.

Federal Reserve ringmasters do not discuss how their capricious manipulations disturb the dollar’s relationship with other currencies. When foreign buyers have decided it is time, the dollar, the stock market, the mortgage market, house prices, long-term interest rates and short-term interest rates will respond to the Bernanke “puts” just as they did to the Greenspan “puts” (the Nasdaq in 2000, houses in 2006). They will explode.

It’s over: Bill Gross declares the 30-year bond bull run at an end

t’s over: Bill Gross declares the 30-year bond bull run at an end
Gregory White

Bill Gross of PIMCO has attacked quantitative easing as a “Ponzi Scheme,” and charged the American public and our politicians, not Ben Bernanke, with fault.

Gross writes:

The Fed, in effect, is telling the markets not to worry about our fiscal deficits, it will be the buyer of first and perhaps last resort. There is no need – as with Charles Ponzi – to find an increasing amount of future gullibles, they will just write the check themselves. I ask you: Has there ever been a Ponzi scheme so brazen? There has not. This one is so unique that it requires a new name. I call it a Sammy scheme, in honor of Uncle Sam and the politicians (as well as its citizens) who have brought us to this critical moment in time. It is not a Bernanke scheme, because this is his only alternative and he shares no responsibility for its origin. It is a Sammy scheme – you and I, and the politicians that we elect every two years – deserve all the blame.

While Gross isn’t sure if QE 2 will work due to our liquidity trap predicament, he is sure who to blame for getting us into this mess. Gross targets the politics of the country at large.

Gross writes:

Each party has shown it can add hundreds of billions of dollars to the national debt with little to show for it or move our military from one country to the next chasing phantoms instead of focusing on more serious problems back home. This isn’t a choice between chocolate and vanilla folks, it’s all rocky road: a few marshmallows to get you excited before the election, but with a lot of nuts to ruin the aftermath.

The impact of this political mess and QE 2 is extremely limited returns for investors in the bond market (and the stock market too). That’s because the combination of inflation and negative interest rates is creating a uniquely bad environment for bondholders, according to Gross.

Gross writes:

But either way it will likely signify the end of a great 30-year bull market in bonds and the necessity for bond managers and, yes, equity managers to adjust to a new environment.


Fraud Caused the 1930s Depression and the Current Financial Crisis

Washington’s Blog
Oct 30, 2010

Robert Shiller – one of the top housing experts in the United States – says that the mortgage fraud is a lot like the fraud which occurred during the Great Depression. As Fortune notes:

Shiller said the danger of foreclosuregate — the scandal in which it has come to light that the biggest banks have routinely mishandled homeownership documents, putting the legality of foreclosures and related sales in doubt — is a replay of the 1930s, when Americans lost faith that institutions such as business and government were dealing fairly.

The former chief accountant of the S.E.C., Lynn Turner, told the New York Times that fraud helped cause the Great Depression:

The amount of gimmickry and outright fraud dwarfs any period since the early 1970’s, when major accounting scams like Equity Funding surfaced, and the 1920’s, when rampant fraud helped cause the crash of 1929 and led to the creation of the S.E.C.

Economist Robert Kuttner writes:

In 1932 through 1934 the Senate Banking Committee, led by its Chief Counsel Ferdinand Pecora, ferreted out the deeper fraud and corruption that led to the Crash of 1929 and the Great Depression.

Similarly, Tom Borgers refers to:

The 1930s’ Pecora Commission, which investigated the fraud that led to the Great Depression ….

Professor William K. Black writes:

The original Pecora investigation documented the causes of the economic collapse that led to the Great Depression. It … established that conflicts of interest and fraud were common among elite finance and government officials.

The Pecora investigations provided the factual basis that produced a consensus that the financial system and political allies were corrupt.


Moreover, the Glass Steagall Act was passed because of the fraudulent use of normal bank deposits for speculative invesments. As the Congressional Research Service notes:

In the Great Depression after 1929, Congress examined the mixing of the “commercial” and “investment” banking industries that occurred in the 1920s. Hearings revealed conflicts of interest and fraud in some banking institutions’ securities activities. A formidable barrier to the mixing of these activities was then set up by the Glass Steagall Act.

Economist James K. Galbraith wrote in the introduction to his father, John Kenneth Galbraith’s, definitive study of the Great Depression, The Great Crash, 1929:

The main relevance of The Great Crash, 1929 to the great crisis of 2008 is surely here. In both cases, the government knew what it should do. Both times, it declined to do it. In the summer of 1929 a few stern words from on high, a rise in the discount rate, a tough investigation into the pyramid schemes of the day, and the house of cards on Wall Street would have tumbled before its fall destroyed the whole economy. In 2004, the FBI warned publicly of “an epidemic of mortgage fraud.” But the government did nothing, and less than nothing, delivering instead low interest rates, deregulation and clear signals that laws would not be enforced. The signals were not subtle: on one occasion the director of the Office of Thrift Supervision came to a conference with copies of the Federal Register and a chainsaw. There followed every manner of scheme to fleece the unsuspecting ….

This was fraud, perpetrated in the first instance by the government on the population, and by the rich on the poor.


The government that permits this to happen is complicit in a vast crime.

As the Great Crash, 1929 documents, there were many fraudulent schemes which occurred in the 1920s and which helped cause the Great Depression. Here’s one example of a pyramid scheme in Florida real estate:

An enterprising Bostonian, Mr. Charles Ponzi, developed a subdivision “near Jacksonville.” It was approximately sixty-five miles west of the city. (In other respects Ponzi believed in good, compact neighborhoods ; he sold twenty-three lots to the acre.) In instances where the subdivision was close to town, as in the case of Manhattan Estates, which were “not more than three fourths of a mile from the prosperous and fast-growing city of Nettie,” the city, as was so of Nettie, did not exist. The congestion of traffic into the state became so severe that in the autumn of 1925 the railroads were forced to proclaim an embargo on less essential freight, which included building materials for developing the subdivisions. Values rose wonderfully. Within forty miles of Miami “inside” lots sold at from $8,000 to $20,000; waterfront lots brought from $15,000 to $25,000, and more or less bona fide seashore sites brought $20,000 to $75,000.”

As DoctorHousingBubble notes:

This Mr. Ponzi of course is the man who gave name to the “Ponzi scheme” that many use today. He laid the groundwork for many of the criminals today in the housing industry. Yet during the boom he wasn’t seen as a criminal but a player in the Florida real estate bubble. Here’s a nice picture of the gentleman:
Charles Ponzi Charles Ponzii

James Galbraith recently said that “at the root of the crisis we find the largest financial swindle in world history”, where “counterfeit” mortgages were “laundered” by the banks.

As he has repeatedly noted, the economy will not recover until the perpetrators of the frauds which caused our current economic crisis are held accountable, so that trust can be restored. See this, this and this.

No wonder James Galbraith has said economists should move into the background, and “criminologists to the forefront.”

Note 1: I asked Professor Black to comment on this essay, and he said the following:

The amount of fraud that drove the Wall Street bubble and its collapse and caused the Great Depression is contested [keep reading to see what Black means]. The Pecora investigation found widespread manipulation of earnings, conflicts of interest, and insider abuse by the nation’s most elite financial leaders. John Kenneth Galbraith’s work documented these abuses. Theoclassical economic accounts, however, ignore or excuse these abuses. The Justice Department did not respond effectively to the crimes that helped spark the Great Depression so we have far fewer facts available to us.

The decisive role that “accounting control frauds” played in driving the current crisis is clear. The FBI warned of an “epidemic” of mortgage fraud in 2004 and predicted that it would cause an economic crisis if it were not stopped. The mortgage lending industry’s own experts reported that “liar’s” loans were “an open invitation to fraudsters” and fully warranted their name — “liar’s” loans — because fraud was endemic in such loans. Lenders and their agents led these lies. They led the lies for an excellent reason — the strategy is a “sure thing” (Akerlof & Romer 1993 — Looting: the Economic Underworld of Bankruptcy for Profit). It guarantees record (albeit fictional) profits, which maximize the CEO’s bonuses. The same strategy for maxmizing fictional income maxmizes real losses in the longer term. When many lenders follow the same fraudulent strategy the result is a hyper-inflated bubble followed by a severe crisis.

Control fraud epidemics also produce “echo” epidemics of fraud in other fields. For example, when lenders are control frauds the CEO establishes perverse incentives (“Gresham’s dynamics”) that corrupt other industries and professions.

By rewarding professionals who are willing to inflate asset values, and refusing to hire honest professionals, control frauds cause the unethical to drive the ethical out of the markets. When one combines deregulation, desupervision, and the perverse incentives of modern executive and professional compensation the result is recurrent, intensifying crises.

Note 2: The Austrian economists point out that it is bubbles which cause crashes. I agree. But as Professor Black points out, fraud is one of the main things which causes bubbles.

Note 3: Of course other factors, such as excess leverage and counterproductive actions by the Federal Reserve, also contributed to the 1930s Depression and the current crisis.

Your Savings Will Be Funding Foreclosuregate

Daniel R Amerman


As a result of apparent systemic incompetence coupled with fraud, it appears there is a chance that most real estate foreclosures may come to a screeching halt on a nationwide basis in the United States. What is missing from the headlines is the real impact on you and I, and how we will be the ones bearing the pain. To understand the implications of this extraordinary situation, we must first pierce a triple charade.

The first charade is the joke which the banking industry – and their regulators – in the United States has been making of contracts and the law. The second charade is the idea that the banks will bear the consequences for their gross negligence and lies, when in fact it is the US government and Federal Reserve that will be bearing the full costs (which is to say, you and I).  The third charade is the idea that taxes will pay for these extraordinary expenses, when the only credible source of sufficient funds is ultimately the destruction of the value of the US dollar.

The economic bottom line (as is so often the case in the these troubling times) is that a massive redistribution of wealth is underway, and most of the US population has no idea what is going on. Which means that the older savers and investors who will be paying most of the real costs for this fiasco, will never understand what happened – they’ll just pay a devastating price as the purchasing power of their life savings plunges.  Fully understand what is happening, on the other hand, and you can not only protect yourself, but position yourself so that wealth is redistributed to you rather than away from you.

The Risk Is Taken By You & I, Not The Banks

Most people have little or no idea how the mortgage market actually works in 2010. There is this outdated idea that banks make mortgage lending decisions, and stand to lose if they make bad decisions with the investment of their money. But effectively speaking, the banks don’t actually make the decisions about who gets loans, nor do they guarantee the loans, nor do they buy the loans.  The government does all of that, as explained in my article “Futile Attempts To Reflate The Housing Bubble & The Deadly Cost”, linked below:


Large scale US government intervention in the mortgage markets is nothing new, as I wrote in my book, Mortgage Securities (Probus, 1993).  The US government has played a crucial role in mortgage credit since the formation of the Federal National Mortgage Association (Fannie Mae) in 1938, followed by the formation of Ginnie Mae and Freddie Mac.  However, in the wake of the subprime mortgage crisis, the US government has gone from being a major player – the dominant player – to being almost the only game in town, on an unprecedented number of levels.

Few private lenders want to take genuine mortgage credit risks in today’s housing market. So the norm for mortgage bankers is to originate “conforming” loans in as many cases as possible, with the standards for those loans being set by FHA, Fannie Mae and/or Freddie Mac, all of which are currently 100% owned by the US government.  Because compliance with government standards is required for a loan to be “conforming”, the federal government effectively makes the credit decisions for the overwhelming majority of mortgage originations in the US.  It is government-controlled mortgage underwriting criteria which determine who is allowed mortgages, and how much they can borrow.

What gives the federal government the ability to set the criteria is that it takes all the credit risk for conforming mortgages, and guarantees the payment of principal and interest to investors.   As soon as they are closed, conforming mortgages are nearly always quickly turned into Fannie Mae, Freddie Mac or Ginnie Mae mortgage securities, which are guaranteed in full by the US Government.

By 2009 and early 2010, however, that extraordinary degree of government intervention was not enough.  The US government wanted something else that was without precedent in US financial history:  it wanted mortgage rates to be lower than the rates the free market would bear. So the Federal Reserve effectively (on a net basis) bought almost all mortgage originations for over a year, once the mortgages had been securitized and turned into government guaranteed mortgage securities.

So the US government decides who qualifies for mortgages, the US government guarantees the mortgages, and the US government buys the mortgages (using money created directly out of thin air as covered in my article “Creating A Trillion From Thin Air”).


What that means is that when something goes wrong, and money can’t be collected from homeowners who are no longer making payments, then it is the citizens of the US who are already essentially taking 100% of the risk.  We’re the ones guaranteeing the mortgages, and with recent mortgage originations, we’re most likely the mortgage security owners as well.

The Banks Have Been Making A Joke Of The Law

When seen from this light then, we can understand that far from providing the money and taking the credit risk, the role of the banking institutions in the mortgage market in the United States is to follow government instructions on the origination and servicing of mortgages, which the US government buys for itself, and guarantees to itself. Unfortunately, the collective banking industry has shown itself to be incapable of handling even these tasks.With genuine capitalism, in a genuine free market, those employees responsible for the current fiasco – as well as their supervisors and top bank executives – would all pay through losing their jobs, and the shareholders would pay with the loss of their investments. Which would then provide keen motivation for the next round of banking executives and shareholders to make sure they get it right the next time.If you want to understand a good part of the reason why this crisis exists, it is because that situation of genuine capitalism and free markets does not exist, and obviously has not existed for some time.  It was the incompetence and negligence of the nation’s major banks that created the mortgage crisis in the first place, with even the most basic due diligence not being performed or acted upon, in the quest for ever larger bonuses for the executives involved.

However, most of those executives remain with their jobs intact, and the banks have not closed their doors. Instead the United States government in a minor role, and the Federal Reserve playing the major role, have made essentially unlimited funds available to bail the bankers out of their mistakes, while still keeping their jobs.  In light of this well understood situation, we can get a sense as to how the banks could be behaving so poorly in their basically clerical duties with regard to the mortgage market at this time. No matter how many mistakes they make, no matter how poorly they perform, the banks will be preserved and protected as institutions because it is held to be a national priority to do so. With the rest of the nation’s citizens picking up the tab for this.

The Biggest Charade:  Saying Taxes Will Pay

Perhaps the biggest and most dangerous charade is the idea that because the US government is guaranteeing the mortgages, and is the owner of so many of the mortgages, that the taxpayer will be taking the hit in the form of higher taxes for the likely huge financial losses that will be associated with this mortgage malfeasance, in one form or another.But the problem with that assumption, as is the case in so many other areas, is that the US government long ago passed the point where it became reasonable to believe that taxpayers could pay for all the promises. We’re already running official deficits well in excess of $1 trillion per year, not accounting for the additional direct monetary creation in even larger amounts by the Federal Reserve. We have no means of paying for the baby boomer retirement promises, nor for the extraordinary international debts we are currently bearing, nor for the ongoing stimulus packages that continue to come out in a series of one after another.These obligations already add up to over $1 million per non-retired and above poverty line household, as covered in my article “Bailout Lies Threaten Your Savings” (http://danielamerman.com/Video/BBL1B.htm ).  The only credible means of paying for all of these vast obligations is the same means that nations have used again and again over the course of history:The government devalues the currency through inflation.Inflation effectively repays much of the debts, and in the process wipes out the value of government bonds for unfortunate bond investors.  Even more profoundly, inflation destroys the value of the life savings for the nation’s citizens. Indeed, for savers, there is not a more expensive means of repaying debts than a high rate of inflation, even if it seems like the magical cure to government officials in power at that time.

When we look at this fast developing crisis with extraordinarily expensive implications for millions of problem mortgages across the United States, we need to clearly understand that it is not the banks that will be bearing the cost, nor will it be the taxpayers who are primarily bearing the cost, but rather it will be the savers and investors within the United States as well as foreign investors that hold US dollars or securities. Ultimately the only source that is large enough to pay for this crisis, when added to all of the other crises already in existence, is an accelerated and more complete destruction of the value of the US dollar.

Three Houses & “Following The Money”

Let’s consider three houses that have gone into foreclosure, due to each of their homeowners no longer having jobs. Each of the mortgages is for $350,000, and the homes are located in California, Nevada and Florida. In each case, the bank servicing the mortgage has committed fraud in their standard foreclosure process, as an effective matter of bank policy. With the bank having said (in essence) “we don’t have to follow these legal technicalities or the letter of the law in general, because well, we’re a bank, and that’s not our industry-standard.”  For the sake of illustration, we will also assume that each one of these foreclosure flaws is effectively “fatal”, and the mortgage lender never does get the house. So there is a 100% loss on investment.The mortgage in California was “conforming”, and had been purchased by the Federal Reserve, after having been converted into a Fannie Mae mortgage-backed security. Fannie Mae guaranteed the mortgage – so Fannie Mae (which is 100% owned by the US government) takes a straight up $350,000 loss, and pays the Federal Reserve.  In other words, the citizens of the US just took a $350,000 loss.  Which the US government can’t pay for, so the Federal Reserve creates the money out of thin air, to provide funds to buy the treasury bonds, that give the US government the money to pay the Federal Reserve the $350,000.(Fannie and Freddie are making noises about going after the banks in these cases, but even if that actually happens we just move to one of the two other categories below.)

The mortgage in Nevada was “non-conforming”, with no federal guarantees, and had been thrown into a huge pool with thousands of other mortgages, with a dozen different types of securities then carved out and sold to investors around the world.  When this extraordinarily complex financial instrument runs into an unsympathetic and literal minded local judge, it turns out that it is legally unclear who the owner of the mortgage is. So there is no foreclosure, the homeowner keeps his or her house, and the $350,000 that actually funded the purchase of “their” house is a 100% loss to investors.The next step is a bit unclear and depends on the specifics of the securities offering, but let’s assume that the banks involved are legally found to have misrepresented the mortgage securities at the time that they were sold, and required to cover investor losses. So the major banks in the United States have a massive liability which they cannot handle, and would bankrupt them if they had to pay it themselves.

The banks need not worry, as the federal government has already determined that will not be allowed to happen. Instead, the massive losses merely trigger another round of bailouts, and the US government steps forward to cover the $350,000 individual mortgage loss (and hundreds of thousands or millions more like it). Except for that troublesome technicality of the US government not having the $350,000. So again, the Federal Reserve directly creates the $350,000 out of the void, uses the new dollars to buy treasury bonds, which gives the federal government the $350,000, and the federal government gives the $350,000 to the banks which give it to the investors to cover the losses from the banks’ mistakes.The mortgage in Florida is very similar to the mortgage in Nevada, except that the bank is not one of the anointed ones. Perhaps the bank had only been committing small-scale fraud on a local basis, rather than massive national fraud, or perhaps the bank executives have been failing to make their expected congressional campaign contributions. The bank is required to make up investor losses that resulted from the bank’s negligence, but can’t do so, and it is taken over by the government. With the FDIC covering the losses and paying off the depositors.

Governmental accounting aside, the FDIC is just as broke as the rest of the federal government, and doesn’t have the $350,000. So the Federal Reserve brings forth $350,000 out of the nothingness, buys $350,000 worth of treasury bonds, the US government takes the new cash and gives it to the FDIC, which uses the money to pay off bank depositor claims.  (There is also the interesting question of whether the government would stiff the mortgage security investors and not make good the losses, thereby sending major shockwaves into other corners of the financial world, including already stressed pension funds.)

Do you see a pattern here?

A bank that projects financial expertise to the world turns out to be unable to handle clerical and administrative functions, or maintain clear ownership of assets.These bank errors result in numerous homeowners across the United States “winning the lottery” and being given the homes they live in, without having to repay the mortgages that paid for their homes.This leads to massive investor losses. Those losses are covered by the federal government in one form or another, whether it be mortgage security guarantees, further rounds of bailouts, or federal deposit insurance payouts.The federal government does not have the money to pay for those losses, so they are paid for by direct new monetary creation by the Federal Reserve.  This may look like “free money”, and is being treated as such by the federal government and Federal Reserve these days, but there is no such thing as free money. Every time the Federal Reserve creates another $350,000, or another billion, or another trillion, it brings forward in time – and increases the severity – of the inflationary explosion that is coming.

Which risks the annihilation of the life savings of all savers in the United States, as well as overseas investors holding US dollars and dollar-denominated securities.

Interpreting The Headlines

Week after week, the financial media have been filled with stories of the trouble the banks have gotten themselves into. These headlines tend to create the impression that those banks are in a lot of trouble.  Indeed, they are.But the banks can’t pay for their way out of the trouble that they are in. So the US government will do so, with the only question being the specifics of the form of the payout. Except the US government can’t pay for these losses either, as it’s already effectively bankrupt, and running huge deficits that can be expected to only grow larger in the future.So the colossal losses are “paid” by the Federal Reserve creating new money on a fantastic scale.  The Federal Reserve, however, possesses neither real economic resources nor taxing authority.  Ultimately, all it can do is dilute the money supply.Which dilutes the value of money. Which brings us back to your savings.

When piercing through the multiple levels of deception, every time you read about another huge problem with Foreclosuregate, understand that it is not the bank that is in deep trouble so much as it is the value of your savings, and your standard of living in future years.

Protecting Yourself

Perhaps the most natural reaction to this article is one of outrage, followed by flight. This is a very understandable reaction. The banks, the US government, and the Federal Reserve have all been behaving in an outrageous fashion that works to the benefit of insiders, while cheating almost the entire rest of the population. The simple solution when the outrage reaches a sufficient point, is to pull all you can out of paper investments and symbolic currencies, put them into gold, and hunker down to survive the still developing crisis.Unfortunately, we live in a complex and deeply unfair world, that makes mincemeat of emotional reactions and simple solutions. As shown in step-by-step, simple – but irrefutable – detail in the article “Hidden Gold Taxes:  The Secret Weapon of Bankrupt Governments” linked below, a simple solution of just buying gold leaves you handing a good chunk of your starting net worth – or perhaps even most of your starting net worth – over to the government by the time all is said and done. The way the government under existing laws effectively confiscates the wealth of gold investors in a highly inflationary environment is little understood by most gold investors, but should form the central point for their planning.http://danielamerman.com/articles/GoldTaxes1.htmLet me suggest an alternative approach, which is to study, learn and reposition. Almost all financial and economic articles that you see today are really about the upcoming re-distribution of wealth, whether those words are used in the article or not. Learn not just how wealth will redistribute, but how unfair government tax policies (that can be relied upon to grow still more unfair) will cripple most simple methods of attempting to survive inflation.

Then, yes – buying gold (and perhaps a lot of it) can be one key component of a portfolio approach, as discussed in my Gold Out-Of-The-Box DVD set. Use multiple components in a dynamic process over the stages of the crisis, with each component doing what it does best, and position yourself so that wealth will be redistributed to you in a manner that reverses the effects of government tax policy. So that instead of paying real taxes on illusionary income, you’re paying illusory taxes on real income. And the more outrageous the government actions – the more your after-inflation and after-tax net worth grows.

Do you know how to Turn Inflation Into Wealth? To position yourself so that inflation will redistribute real wealth to you, and the higher the rate of inflation – the more your after-inflation net worth grows?  Do you know how to achieve these gains on a long-term and tax-advantaged basis?  Do you know how to potentially triple your after-tax and after-inflation returns through Reversing The Inflation Tax? So that instead of paying real taxes on illusionary income, you are paying illusionary taxes on real increases in net worth?  These are among the many topics covered in the free “Turning Inflation Into Wealth” Mini-Course.  Starting simple, this course delivers a series of 10-15 minute readings, with each reading building on the knowledge and information contained in previous readings.  More information on the course is available at DanielAmerman.com or InflationIntoWealth.com.

12 Polls That Prove That The American People Are Really, Really Pissed Off As Election Day 2010 Approaches

The American Dream
Oct 29, 2010

The American people are mad.  No, check that, they are steaming mad.  In the weeks leading up to the election, poll after poll after poll has shown that the American people are angrier at government than at any other point in modern U.S. history.  American voters have been angry before, but this time it is different.  Instead of being mad at just one political party, the American people are now clearly disgusted with both political parties.  Neither major party has a positive approval rating.  People are sick and tired of the economy being in the tank, they are sick and tired of not being able to get good jobs and they are sick and tired of the nonsense that has been going on in Washington.  Both political parties are busy pointing fingers at each other, but what all the major polls in the weeks leading up to the election clearly show is that the American people are placing the blame on both the Republicans and the Democrats.  In fact, as you will see below, a clear majority of the American people now wish that they could throw every member of Congress out of office and a clear majority of the American people now wish that they had a third political party to vote for.  We have arrived at a point where both political parties have lost the faith of the American people, and where we go from here is anyone’s guess.

Not that the American people have a clear idea of what they actually want.  The truth is that the citizens of the United States are deeply, deeply divided on a whole host of issues.  But the one thing that American voters can agree on is that they are hopping mad.

The following are 12 recent polls that prove that the American people are really, really pissed off as election day approaches….

#1 According to a recent USA Today/Gallup poll, only about one in four Americans is satisfied with the way that the country is being governed.

#2 The latest ABC News/Yahoo poll found that faith in the U.S. system of government is at a 36 year low.

#3 The newest New York Times/CBS News survey discovered that about 60 percent of American voters believe that their own members of Congress do not deserve to be re-elected.

#4 According to Gallup, Barack Obama had an average approval rating of just 44.7% during the seventh quarter of his presidency, which was a new low.  Obama’s average approval rating has fallen substantially every single quarter since he took office.

#5 A Bloomberg National Poll conducted a couple of weeks ago found that more than 40 percent of likely voters who once considered themselves to be Obama supporters are now either less supportive of Obama or do not support him at all at this point.

#6 An absolutely stunning Gallup poll released last month revealed that a whopping 58 percent of the American people believe that a third political party is needed because the Republicans and the Democrats are doing such a bad job of representing the American people.

#7 A new study by The Washington Post, the Henry J. Kaiser Family Foundation and Harvard University discovered that more than 40 percent of the American people would give the government either a D or an F.

#8 CNBC recently conducted a survey which found that 92 percent of Americans rate the U.S. economy as either “fair” or “poor”.

#9 A new NBC News/Wall Street Journal survey revealed that 69 percent of Americans believe that free trade agreements have cost the United States jobs.  Only 18 percent of the survey respondents said that they believed that free trade agreements have created more American jobs than they have lost.

#10 A Politico/George Washington University Battleground Poll released late last month found that 63 percent of the American people believe that the nation is on the wrong track.

#11 A recent Gallup poll discovered that 46% of Americans believe that the U.S. federal government “poses an immediate threat to the rights and freedoms of ordinary citizens.”

#12 A Rasmussen Reports national telephone survey that was just completed found that 65% of likely U.S. voters say that if they had the option, they would vote out every member of Congress and start all over.

So will all of this anger result in major change happening in Washington D.C. after the election?


There are 435 seats in the U.S. House of Representatives.  At the very most, about 100 of those seats are actually “in play” – meaning that they have a chance to change hands.

So that means that we are going to see at least 335 of the exact same faces when the U.S. House of Representatives begins a new session.

The cold, hard reality is that our current system greatly, greatly, greatly favors incumbents.

Over the past five elections, incumbents have been re-elected to the U.S. House of Representatives at an average rate of 96 percent.

Wouldn’t you like to have a 96 percent chance of winning?

Sure, in 2010 things will be a little different, but we will still likely see incumbents winning at least 80 percent of their matchups.

So much for “change”, eh?